Pairs trading: portfolio selection and trade execution

Abstract

In this study, we investigate whether ‘Pairs Trading‘ strategy is applicable in the Indian financial markets. This strategy has been used by Statistical Arbitrageurs in major markets like USA and Europe. These markets are highly mature and liquid which is one of the key requirements for any statistical arbitrage strategy implementation. Since India is a developing country and the financial markets are comparatively less mature, less liquid and less stable, it makes an interesting proposition to see whether Statistical Arbitrage techniques can be applied in developing markets or not. We tried to implement the strategy on NSE-50 stocks with their Closing Prices used for Back Testing. The Implementation of the strategy is based on the ideas suggest by Daniel Herlemont (Herlemont, D. 2003)